TRUST FABRICS, LAHORE VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1024 (2004)

Sales Tax Act (VII of 1990)---

----S. 21(4)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.9 & 11---Black listing and suspension of registration of complainant for evasion of tax and issuance of fake invoices---Additional Collector on 25-10-2003 passed such order, which was approved by Collector on 24-11-2003---Validity---Impugned order, dated 25-10-2003 was not with approval of Collector---Impugned order had not been passed by Collector nor power of Collector had been delegated to Additional Collector---Impugned order was illegal and without jurisdiction---No remedy of appeal was provided in Sales Tax Act, 1990 against process employed in matters of black listing or suspension of registration---Provisions of S.9(2)(b) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000 would not stand in way of investigation by Ombudsman in such case---Maladministration was obvious as impugned order had been passed by an authority other than Collector, which was contrary to law---Federal Tax Ombudsman recommended to Revenue to recall impugned order with observation that if Collector wished to proceed against complainant, he would be free to take action permissible in law.

Muhammad Akbar, Advisor (Dealing Officer).

Shahid Mehmood Sheikh for the Complainant.

Mazhar Waseem, D.C. (Audit) for Respondent.

DECISION/FINDINGS

JUSTICE (RETD.) SALEEM AKHTAR (FEDERAL TAX OMBUDSMAN).---Facts of the complaint are that the complainant, registered with Sales Tax Department and doing wholesale business in Textile products was blacklisted by the Collectorate of Sales Tax, Lahore allegedly in violation of the provisions of subsection (4) of section 21 of the Sales Tax Act, 1990, which empowers the Collector to blacklist or suspend the registration of any unit involved in evasion of sales tax or issuing fake invoices. Neither any audit was conducted to establish complainant's involvement in tax evasion nor did the department have any other proof of his involvement in issuance of fake invoices. The competent authority (Collector) did not approve blacklisting of complainant's unit nor did the respondents communicate to him any decision in this regard. The act of blacklisting/suspension of registration has adversely affected his business.

2. However, D.C. (Audit) conducted audit of the unit and communicated audit observations, which were replied to. The audit pointed out that (i) the complainant showed negligence value-addition and suppressed sales worth Rs.2.4637 Million involving sales tax of Rs.369,550 (excluding additional tax and further tax), (ii) he made purchases of Rs.89.338 Million and made sales worth Rs.91 Million and even at the rate of return at 5% the sales should have been worth Rs.93.805 Million, and (iii) he purchased yarn from Messrs Major Textile, a suspect unit included in the blacklist, and unlawfully adjusted input tax on the basis of fake invoices issued by the aforesaid unit. The complainant challenged the liability as wrongly worked out on account of low value addition. Neither any valuation committee was appointed to determine the correct value in terms of section 2(46)(e) nor had the C.B.R. fixed any values in terms of section 2(46)(g) of the Sales Tax Act, 1990. The audit team, therefore, acted in violation of the provisions of law by fixing arbitrary value-addition at 5%. They also failed to take into account unsold stock and mistakenly presumed that all purchases had been sold out. Unsold stock remains part of the inventory and at that time may have exceeded the value of sale. Purchases from the said unit were made during April, 2003 while the unit in question was blacklisted during August, 2003. Nobody could anticipate that the supplier would be blacklisted. The Honourable F.T.O. while disposing of the complaint of Messrs Arzoo Textile, Faisalabad ruled that no buyer could be condemned for any illegality or wrong done by the supplier. The conditions for input tax adjustment as provided in section 7 of the Sales Tax Act, 1990 were fulfilled and the input tax adjustment was lawfully claimed. The respondents may be asked to withdraw their objections. Despite a detailed reply the D.C. (Audit) ignored complainant's explanation and acted in an arbitrary manner. The audit was completed for the period July, 2002 to June, 2003 and the report was issued on 18-10-2003. The complainant received official intimation of blacklisting on 29-10-2003 while computer profile showed the complainant's name under the category. of suspicious units on 2-10-2003. Another notice dated 31-10-2003 for audit has been issued in violation of section 25(2) of the Sales Tax Act, 1990 which is `maladministration'. The respondents may be directed to delete complainant's name from the list of suspect unit and they may be asked to withdraw their objections regarding adjustment of input tax of Rs.1,617,649 and liability of Rs.369,550 worked out on presumption. The Collector may also be directed to take appropriate action against D.C.(Audit) for violation of law.

3. In reply, the respondents have taken preliminary objections to F.T.O's. jurisdiction on the ground that the complaint being sub judice is not maintainable under clauses (a) & (b) of subsection (2) of section 9 of the Establishment of Office of Federal tax Ombudsman Ordinance, 2000. The audit of the complainant was carried out and the complainant was found to be involved in issuing fake/flying invoices. His name was blacklisted under the provisions of section 21(4) of the Sales Tax Act, 1990 and based on the findings of audit a contravention case was made out. A show-cause notice has also been issued. The complainant created the proprietorship with opening capital of Rs.5 'lac but during the period from 1-7-2002 to 30-6-2003 he purchased and sold goods valuing more than Rs.9 crore. Huge sales are not possible with an opening capital of Rs.5 lac. The registered person failed to disclose the legitimate source of funds. Against total sales of Rs.91,341,490 the complainant had made purchases of Rs.93,097,876. The purchases so made were more than sales, showing a loss of Rs.1,756,386. The complainant did not pay any sales tax despite making huge sales. He is involved in issuance of fake/flying invoices. He had purchased goods worth Rs.10,784,310 from Messrs Major Textile. Physical verification revealed that the said Mill did not exist. It issued only fake/flying invoices, which were purchased by the complainant to enhance his input tax entitlement and to offset his own tax liability. Thus the complainant acted as conduit for fake/flying invoices which were ultimately being used by the exports for obtaining fraudulent refunds. He was blacklisted to prevent loss of revenue caused by fraudulent refund being claimed against the fake/flying invoices issued by the complainant. Since show-cause notice has been issued by an independent authority the complainant will have the opportunity to defend his case. The complainant misdeclared value of his sale to evade sales tax. The extent of evaded sales tax was calculated on the basis of minimum possible 5% value-addition. In the case of Messrs Arzoo Textile Faisalabad the affected party was an exporter whereas the complainant is a wholesaler who is involved in buying and selling of sales tax invoices. In the case of Messrs Arzoo Textile the Honourable F.T.O. had recommended action against supplier who was involved in fake/flying invoices. The complainant himself is also a supplier, hence action against him is being taken as provided under law. Show-cause notice has been issued but the complainant is avoiding facing the proceedings. The audit of the, unit was completed on 27-9-2003 audit observations were issued on 27-9-2003. In the audit observation the complainant was intimated that his name would be blacklisted for involvements in issuance of fake/flying invoices. As complainant's reply to audit findings was found unsatisfactory, a contravention case was made out and his name was blacklisted in terms of section 21(4) of the Sales Tax Act. The order dated 25-10-2003 blacklisting the complainant was issued after fulfilling the legal requirements of section 2114) of the Act.

4. During the hearing the A.R. reiterated the arguments as 'advanced in the written complaint emphasizing that the act of blacklisting and suspension of his registration is violative of the provisions of section 21(4) of the Sales Tax Act, 1990. The order was neither approved by the Collector nor was it communicated to the complainant in writing. No adverse action could be taken at his back. The order does not record reasons for blacklisting. Purchases were made from Messrs Major Textile in April 2003 at a time when they were not blacklisted.

5. The D.R. submitted that the Collector was satisfied that the complainant was engaged in issuing of fake/flying invoices and passed the impugned order in accordance with the provisions of section 21(4) of the Sales Tax Act, 1996. The order was communicated to the complainant. It was received by them on 29-10-2003 as admitted in para. 8 of the complaint. The findings of the audit were communicated on 27-9-2003. The complainant was provided the opportunity of filing reply which he did vide his letter dated 13-10-2003. Since the reply was not satisfactory the audit report was issued on-18-10-2003 and a copy thereof was endorsed to the complainant. Show cause was issued before the expiry of 90 days. If contraventions framed against the complainant are not proved before the Adjudication Authority his name would be deleted from the blacklist. He should defend his case before the Adjudicating Authority. Asked why the Collector did not himself issue the order, the D.R. submitted that while blacklisting/suspension of registration was approved by the Collector the order was issued by Additional Collector, Headquarter. Asked to show Collector's approval for blacklisting/suspending the registration of the complainant, the D.R. produced Order Sheet (on record) showing Collector's approval to blacklisting/suspension.

6. The arguments of the parties and the record of the case have been considered and examined. It is observed that Messrs Trust Fabrics (the complainant) was blacklisted and its registration was suspended in terms of section 21(4) of the Sales Tax Act, 1990 vide order dated 25-10-2003 (on record). The order blacklisting the complainant and suspending his registration was issued on 25-10-2003 by the Additional Collector, Headquarters and communicated, among others, to the complainant. During the hearing the D.R. submitted that the order for blacklisting and suspension of registration was approved by the collector vide para.35 of his order on order sheet, which means that Collector's approval had been obtained in the case. It is, however, observed that while the so-called order of blacklisting/suspension of registration was passed on 25-10-2003 and communicated to the complainant the Collector approved the same on 24-11-2003. Thus the impugned order dated 25-10-2003 was not with the approval of the Collector. It is not the case of the Department that the order was passed by the Collector, nor it has been pleaded that the power of the Collector was delegated to the Additional Collector. In this regard reference is made to the provisions of subsection (4) of section 21 of the Sales Tax Act which reads:

"provided that in case where the Collector is satisfied that a registered person is so found to have issued fake invoices, evaded tax or has committed tax fraud, he may blacklist such person or suspend his registration or as the case may be enrollment pending further inquiry."

The so-called order dated 25-10-2003 blacklisting the complainant and suspending its registration is illegal as it was passed by the Additional Collector and not by the Collector. The said order is without jurisdiction and arbitrary.

7. Show-cause notice dated 30-10-2003, however, confronts the complainants with contraventions pointed out by the audit. It was dispatched to the complainant by post and a postal receipt thereof has been placed on record. A copy of the findings of audit report was endorsed to the complainant on 27-9-2003 to which the complainant had replied. Not finding reply of the complainant as satisfactory a show-cause notice was issued.

8. The order of blacklisting suspension of registration issued by the Additional Collector is violative of the provisions of section 21(4) of the Sales Tax Act, 1990 and is contrary to law. As respects objection by the Revenue to the jurisdiction of the F.T.O. to entertain the complainant, the same is based on misreading of the provisions of section 9(2) of the F.T.O. Ordinance. Clause (b) of subsection (2) of section 9 relates only to decisions on matters enumerated therein "in respect of which remedies of appeal, review or revision are available in the relevant legislation" itself. On the other hand, no such remedy has been provided in respect of a process employed in matters of blacklisting or suspension of registration. Since the matter in the complaint-in-hand relates to the process employed by the respondents, against which no appeal (etc.) is provided in the Sales Tax Act, 1990, the provisions of section 9(2)(b) of the F.T.O. Ordinance do not stand in the way of investigation by the F.T.O. In the present case `maladministration' is obvious as the complainant's name has been blacklisted and its registration suspended by an authority other than the Collector which is contrary to law as explained above. Thus all proceedings in pursuance of such order including issuance of notice dated 30-10-2003 are contrary to law without jurisdiction and fall under the category of `maladministration' as defined in Establishment of Office of Federal Tax Ombudsman Ordinance, 2000. However, if the respondents intend to include the complainant's name in the blacklist or suspend its registration they need to follow the procedure laid down in law. In view of the foregoing discussion it is recommended that the C.B.R./Collector:

(i) To recall the order dated 25-10-2003 and notice dated 30-10-2003 and delete complainant's name from the blacklist dated 25-10-2003.

(ii) If the Collector wishes to proceed against the complainant he would be free to take such action as permissible in law.

(iii) Compliance be reported within 30 days.

S.A.K./252/F.T.O.Order accordingly.